7. Foster Valdes

CHILEAN AGRICULTURE AND MAJOR ECONOMIC REFORMS: GROWTH, TRADE, POVERTY AND THE ENVIRONMENT William FOSTER* and Alberto VALDÉS** Abstract - This study examines the Chilean experience of economic and trade reforms, deregulation and privatization beginning in the 1970s, and their effect on the agricultural sector from the 1980s to the present. Especially interesting is the interaction between the sectoral, macroeconomic and institutional reforms that influenced the incentive structure in factor markets. This study presents an interpretation of the principal impacts of the reforms and how they contributed to changes in the level and composition of production, the significant reduction in rural poverty, and rural-urban migration. The greater orientation toward the production of exportables encouraged by economic reforms contributed significantly to rural employment and incomes, and was also associated with a reduction in agro-chemical use relative to production value. Key-words - CHILE, AGRICULTURAL POLICY, REFORMS, AGRICUL- TURAL EXPORTS, TRADE LIBERALIZATION, RURAL POVERTY, RURAL URBAN MIGRATIONS. JEL Classification: Q12, Q13, Q17, Q18. This paper draws on material in Valdes and Foster (2002, 2003a, 2003b). The authors gratefully acknowledge the comments and suggestions of Henri Regnault. * Professor, Universidad Católica de Chile, Santiago. ** Associate Researcher, Universidad Católica de Chile, Santiago. Région et Développement n° 23-2006 188 William Foster and Alberto Valdés INTRODUCTION This paper reviews the Chilean experience with broad policy reforms that began during the 1970s and the effects of these reforms on the agricultural sector. Of particular interest are those policies (sectoral and macroeconomic) and elements of the institutional framework that influence both the incentive framework facing the agriculture sector, and factor markets. Have price policies aimed specifically at the agricultural sector been less influential than economy- wide policies such as macroeconomic policies, deregulation and privatization? To what extent has the expansion of the export agricultural sector been the unintended result of economic reforms? Part I discusses the recent history of agricultural policies in Chile. Among the earliest reformers, Chile began radical structural and sectoral policy changes oriented toward open trade, privatization and economic deregulation approxi- mately two years following the end of the Allende regime in 1973à 1. But beginning the story of agricultural policies at an early date is not merely interesting, but indispensable: the major reforms affecting agriculture during the 1990s and early 2000s were extensions of an earlier profound shift in the government's approach to the economy generally and agriculture specifically. To understand the tendency and motivation of recent policy changes one should appreciate the radical reforms toward open markets that began thirty years ago following an earlier period of interventionism and a drastic re-structuring of the sector during the late 1960s and early 1970s. Part 2 presents an interpretation of the main impacts of the reforms and other changes in the policy environment on production. Emphasis is placed on indicators of sectoral performance, produc- tivity and agro-chemical use. Part 3 discusses the social effects of agricultural reforms in regards to rural poverty and rural-urban immigration. Finally, concluding remarks are presented. 1. A SHORT HISTORY OF AGRICULTURAL POLICIES IN CHILE 1.1. Controlled markets: 1950 to 1974 During the administration of President Alessandri, between the late 1950s and the mid-1960s, the three main goals of economic policy important to agriculture were the control of inflation, the reduction of the budget deficit, and the improvement of net foreign exchange earning. To stabilize prices the à 1 The history of agricultural policies for the period 1960-1984 is well documented in Hurtado, Valdés and Muchnik (1990), a synthesis of which appears in Valdes, Hurtado and Muchnik (1991). For a history of land policies during the period 1973-1980, see Jarvis (1985). See Odepa (2001) for a presentation of the current government strategy towards agriculture. Région et Développement 189 government had a policy of fixing both nominal farm prices for essential products (wage goods: wheat, bread, beef, milk, rice, sugar, and oilseeds, among others), nominal exchange rates, and marketing margins at the retail level. There were export prohibitions of certain products (wheat, flour, lamb, and others) but export promotion of fruits. After a brief attempt at trade liberalization, at the end of 1961, tariffs were increased, import quotas and licenses revived. For agriculture there were differentiated tariffs and prior deposits for imports on products and agrochemicals and machinery. There were, in addition, development programs, particularly for livestock, with subsidies for milk producers, state aid in the construction of slaughter houses, and other investment incentives. The rationing of beef (so-called meatless days) and the prohibition of the slaughter of young and pregnant cattle were mandated. Subsidized credit rates and subsidies on railway transportation for wheat, cattle and forages were established. In 1960 a marketing board (ECA) for purchases and sales was established, beginning with wheat and byproducts, later with the authority to extend operations to all products in an attempt to guarantee a "normal supply" of products. The board also gained a monopoly on imports. In 1965 during the Frei Montalva administration a more explicit agricultural policy was formulated oriented toward self-sufficiency and the coordination of relative prices to increase overall production. The interventionist price regime intensified in the direction of production and consumption patterns. There were restrictive tariffs, fixed prices for consumers and minimum prices for producers, fixed marketing margins for the major staple crops, export quotas, licenses and prohibitions and quotas on wheat, flour, milk, beef. Prohibitions on slaughter and the consumption of meat on certain days were intensified. Tax rebates (up to 30% of the fob price) on certain exports were introduced (fruits and lamb). Previous interventions in input markets continued, and, to avoid over-evaluation, a crawling peg system for exchange rates was adopted. To encourage production, the government recognized the importance of relative prices: the prices of farm products were allowed to rise more quickly than non-agricultural goods. To diminish marketing margins, the government intervened in marketing channels, increasing storage and processing facilities, improving transport systems, holding food security stocks of staples, and opera- ting marketing boards to support the prices of wage goods. Of course, a tension emerged between the objective of increasing production through higher prices and raising rural relative to urban wages, and the objective of restraining wages in the non-agricultural sector. 1.2. Land reform and the final days of control The previous land reform program of the Alessandri years was small in scale, based on voluntary sales at market prices, and oriented towards the promotion of small-scale farms. By contrast, under the Frei administration, a 190 William Foster and Alberto Valdés massive land reform was introduced in 1967 based on expropriations, with partial compensation determined by the state, and oriented toward the establish- ment of large, cooperative farms (los asentamientos). There was no intention of subdivision and the creation of small private farms. A private producer was subject to expropriation with greater than 80 hectares of irrigated land (or its equivalent). During the Allende years (1971-1973), the expropriation-based land reform program was strengthened, reaching 40% to 50% of farmland resources (as measured by productive equivalents), and the farm production model was based on semi-collectivized, large operations 2. The interventionist economic policy intensified, inflation accelerated, and, given the logic of the prevailing economic model, the government responded with even more severe price controls. Intense inflation and price controls le d to food shortages and black markets. The government reacted with an attempt to monopolize the markets for fertilizer, wheat, maize, milk, sugar, and other products. In the area of foreign trade, the government accentuated the protectionism of the previous administration, fixing the nominal exchange rate, and the state's import monopoly, and export controls became stricter. 1.3. The move toward markets Confronted with hyperinflation, large deficits in internal and external accounts, and a large part of the economy generally (including agriculture) in state hands, the military government beginning in late 1973 radically changed economic and agricultural policies towards market-based resource allocations. The role of the government in the economy was reduced, trade liberalized and private property rights strengthened. During the first phase of reforms, between 1973 and 1983, general economic reforms were put into effect quickly and sector-specific reforms were deferred. Macroeconomic stabilization and the maintenance of the credibility of reforms were key considerations. In agriculture, reforms affected land markets, reduced government invol- vement in services. Input and product markets were privatized. Especially important, the new land policy was to provide unrestricted access to land owner- ship with

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